With monopoly power contributing an estimated £2.4 billion of Google and Facebook’s profits in 2018 in the UK alone (Phillip, 2022), it becomes essential to discuss the necessity of regulation in Big Tech firms. The image below (Figure 1) shows the main broader effects Big Tech cause, along with their direct and indirect impacts. This essay will focus on the negative redistributive and spillover effects and the anti-competitive effects, as well as how to regulate these firms using the understanding of economics in order to minimise the harmful externalities caused by these monopolies.
Figure 1 (Department for Digital, Culture, 2022)
Redistributive and spillover effects
The initial concern is redistribution, as Big Tech redistributes itself where employment opportunities are available (Department for Digital, Culture, 2022), usually setting up their manufacturing process outside their headquarters. For example, a vast proportion of Apple’s production takes place in China, as the labour costs are low, thus decreasing the costs of production. Although outsourcing provides competitive prices in the domestic economy, it harms the country as the money goes out of the economy, reducing the balance of payments stability and causing a current account deficit. In addition, outsourcing means that the home country loses out on potential employment. A possible solution is to ensure Big Tech have a certain level of the manufacturing process in their home economy. This can be imposed by regulation or encouraged by providing subsidies to the firms for producing goods in the local economy. However, subsidies inevitably come with an opportunity cost of using that money elsewhere, making it less feasible.
The other aspect of the wider effects in Figure 1 is spillover effects. The tech industry usually produces their goods in countries like China or India, which are fossil fuel-heavy, causing them to contribute to around 2-3% of the world’s carbon emissions in 2021. To counter this, Google and Facebook pledged $925 million to zero out emissions (Navarro, 2023), but action like this increases their cost of production, leading to cost-push inflation and decreasing the real value of money. Higher prices decrease aggregate demand and make the firm less internationally competitive, thus overall hindering economic growth. Even so, environmental regulation could still be a net positive if the firm is not exceedingly regulated and if it incentivises firms to decrease their costs of production to offset the effect of regulation (Jaffe et al., 1995). Policies such as setting minimum environmental standards during production also help promote sustainable practices, which protect the environment, and so prevent market failure in the long term.
Market structure and competition
All Big Tech companies have lawsuits filed against them for exploiting their monopoly power and trying to reduce competition. A few ways that monopolies reduce competition are discussed below:
Buying potential competitors - Big Tech firms buy out smaller firms early on if they see them as a potential threat in the future. For example, Facebook, or Meta, bought WhatsApp and Instagram to reduce competition.
Self-preferencing - If a firm (such as Amazon) acts as a platform where buyers meet sellers, and the firm is itself a seller, it promotes its own products more than other products.
Price restrictions - These platforms do not allow small sellers on their platform to sell their products at a lower price anywhere else.
Bargaining power - Small businesses are dependent on these large platforms, allowing these platforms to exploit their power against the businesses (Department for Digital, Culture, 2022). For example, Apple has a 30% commission on all sales in Appstore, which reduces the profits of smaller app developers. (Smith, 2021)
Presence - Big Tech firms can spend much more on prominence and advertising than small firms. (Department for Digital, Culture, 2022)
Data usage - These tech giants accumulate data to personalise content and advertisement to users accordingly (McNamee, 2020). This is unfair to smaller firms that have no means of collecting such vast amounts of data, hence acting as an indirect barrier to entry.
Competition drives innovation and incentivises firms to produce better quality goods and at lower prices as much as possible to stand out. Lower prices increase the purchasing power of individuals, causing total consumption (C) and investments (I) in an economy to increase, whilst also increasing exports (X) and reducing imports (M), all ultimately increasing Aggregate Demand (AD), as AD = C+I+G+(X-M), thus overall increasing economic growth. Lower prices contribute to low inflation, and the resulting increase in demand leads to increased employment. Therefore, all the macroeconomic objectives can be achieved by just increasing competition.
Consequently, the British government last year made several regulations against Big Tech companies, starting with establishing a specialist unit within the Competition and Markets Authority (CMA) called the DMU - the Digital Markets Unit - in April 2021, whose primary purpose was to ensure a pro-competition regime. The DMU has the power to fine firms up to 10% of their global turnover, as well as an additional 5% of their daily turnover every day the offence is continued (Dorries & Kwarteng, 2022) (Shalchi & Davies, 2023). Economically, these fines should be increased, as they generate more revenue for the government, act as a progressive tax, and hence reduce income inequality while increasing the fiscal budget. This fine could also be used to fund the DMU. The CMA has also been given more visibility over mergers, and consistent rules for mergers have been set. Although mergers are beneficial for the economy, as the firms can benefit more from economies of scale and increase productivity, it reduces competition, which is harmful to the economy, which is the only aspect CMA considers when deciding whether to intervene in a merger or not. An additional policy that the government could introduce if monopolies unfairly raise prices, is that they can set maximum prices below the market equilibrium, which can reduce the price level set by these monopolies, reducing super normal profits.
In conclusion, redistribution of manufacturing factories, negative environmental externalities, and abuse of monopoly power are all threats posed by Big Tech in a free market system, which risk direct harm to the economic agents: individuals, firms, and the economy as a whole. Means of regulation such as fines, laws, specialist watchdog units (such as DMU and CMA) and maximum prices are not only helpful, but are essential to improve economic growth, employment, price stability and to prevent market failure caused by Big Tech dominance.
References
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Dorries, N. and Kwarteng, K. (2022) A new pro-competition regime for digital markets - government response to consultation, GOV.UK. Available at: https://www.gov.uk/government/consultations/a-new-pro-competition-regime-for-digital-markets/outcome/a-new-pro-competition-regime-for-digital-markets-government-response-to-consultation#part-5-pro-competitive-interventions-pcis\ (Accessed: 6 July 2023)
Department for Digital, Culture, M. and S. (2022) Measuring the impact of Big Tech firms on the UK economy, GOV.UK. Available at: https://www.gov.uk/government/publications/measuring-the-impact-of-big-tech-firms-on-the-uk-economy (Accessed: 12 July 2023).
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McNamee, R. (2020) Big Tech needs to be regulated. here’s how., Time. Available at: https://time.com/5872868/big-tech-regulated-here-is-4-ways/ (Accessed: 3 July 2023).
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Phillip, C. (2022) Government sets out plans for how tech regulator will tackle dominance of major firms, GOV.UK. Available at: https://www.gov.uk/government/news/government-sets-out-plans-for-how-tech-regulator-will-tackle-dominance-of-major-firms (Accessed: 8 July 2023).
Shalchi, A. and Davies, J.M. (2023a) Digital Markets, competition and consumers bill: Digital Markets and ... Available at: https://researchbriefings.files.parliament.uk/documents/CBP-9794/CBP-9794.pdf (Accessed: 6 July 2023).
Smith, K.A. (2021) Big Tech faces big regulation-here’s what that means for you, Forbes. Available at: https://www.forbes.com/advisor/investing/big-tech-regulation/ (Accessed: 12 July 2023).
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